WHAT IS CAPITALISATION?

Capitalisation refers to the long term indebtedness and

includes both the ownership capital and the borrowed capital. Capital and Capitalisation are two different terms. Capitalisation means the total par value of all the securities, i.e. shares and debentures issued by a company and reserves, surplus and value of all other long term obligations

 . The term thus includes the value of ordinary and

preference shares, the value of all surplus earned and capital, the value of bonds and securities still not redeemed and the value of long term loans.

OVER CAPITALISATION
when a company is not in a position to pay dividends and

interests on its shares and debentures at fair rates, it is said to be over capitalised.

CAUSES OF OVER CAPITALISATION

Floating of excess capital.
Purchasing property at an inflated price. Inflationary conditions.

High cost of promotion.

Borrowings at a higher than normal rate. Purchase of assets in the boom period.

 Incorrect capitalisation rate applied.

Insufficient provision for depreciation. High rates of taxation.

Liberal dividend policy.

Wrong estimation of future earnings. Low production.

REMEDIAL MEASURES TO CORRECT OVER-CAPITALISATION

Reduction of funded debts.
Reduction of interest on debentures and loans. Reduction of preference shares.

Reduction of face value of the shares.

Reduction in the number of equity shares. Ploughing back of profits.

EFFECTS OF OVER-CAPITALISATION
Loss of goodwill.
Difficulty in obtaining capital. Liquidation.

Loss of Market.
Low rate of dividend Fall in the Market value of shares

UNDER CAPITALISATION
"A corporation may be under-capitalised when the rate of

profits it is making on the total capital is exceptionally high in relation to the return enjoyed by similarly situated companies in the same industry Under-capitalisation is a condition where the real value of the company is more than its book value

CAUSES OF UNDERCAPITALISATION
Under estimation of capital requirements.
Under estimation of future earnings. Promotion during deflation.

Narrow dividend policy.

Desire of control. Excessive depreciation provided. Maintenance of high efficiency. Secret reserves. Difficulty in procurement of capital.

REMEDIES OF UNDERCAPITALISATION
Splitting up of shares.
Increasing the number of shares. Increase in the par value of shares.

Issue of Bonus shares.

Fresh issue of shares.. Limited marketability of shares.

 Government control.
Inadequacy of capital. Secret reserves

High taxes.
Manipulation of share values. Dissatisfaction of customers

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